Taxes are never a business owner’s favorite topic. Some even consider it to be one of the most difficult aspects of running a business. It’s probably one of your (or one of your staff’s) biggest burdens, too.
Taxes are a financial and administrative burden for small businesses. It limits their capacity to invest in their company, their employees, and compete in the larger economy. According to the NFIB’s 2021 Tax Survey, 77% of small business owners felt that federal business income taxes were very or moderately burdensome. The survey shows that 64% of small business owners believe that federal business income taxes impose an administrative burden on their operations.
What makes taxes so difficult for small business owners?
Taxes directly reduce profits, and profits are the principal source of funding for small businesses. Profit margins aren’t always stable or predictable for small business owners from year to year. Owners rely on substantial earnings to assist them during rough sales periods or seasonal sales cycles, which many owners are still experiencing in the pandemic.
How to Reduce the Tax Burden on Your Small Business
Taxes cost your company both time and money. Fortunately, there are numerous legal and ethical tax-saving options available to help you decrease your taxable liability as a business owner. Consider some of the options listed below if you need to minimize your taxable income this year.
1. Hiring Family Members
Hiring a family member is one of the best strategies to decrease taxes for your small business. The Internal Revenue Service (IRS) provides a number of options, all of which have the potential benefit of shifting income from higher tax brackets to lower income dependents. Business owners often hire their own children for marketing assistance, office administrative tasks, promotional photoshoots and more.
For example, sole proprietorships are exempt from paying social security and Medicare taxes on a child’s salary, as well as the Federal Unemployment Tax Act (FUTA). It is critical to emphasize that earnings must be derived from legitimate business activities.
The IRS also provides small business owners with the option of lowering their taxes by hiring a spouse who is not subject to the FUTA tax. Depending on the benefits they receive from another income, you may be able to set aside retirement funds for them as well.
2. Create A Retirement Plan
As a small business owner, there are various retirement plan options that can help you optimize your retirement investments while also reaping tax benefits. For example, the IRS permits you to contribute up to $57,000 in total contributions for retirement through a single-participant 401(k) plan.
3. Save Money for Future Medical Expenses
Putting money away for healthcare expenses is one of the best methods to lower small business taxes. Medical costs continue to rise, and even if you are currently healthy, saving money for unexpected or future healthcare demands is critical. If you have a qualified high-deductible health plan, you can do this through a Health Savings Account (HSA).
4. Choose the Right Entity Structure for Your Company
You don’t have the benefit of an employer paying a percentage of your taxes as a small business owner. You are required to pay the full amount of Social Security and Medicare taxes. You must still pay such taxes if your company is taxed as a Limited Liability Company (LLC). In many cases, you may be able to reduce half of those two tax liabilities.
This is a good decision for many industries and businesses. While there are factors to consider when making this step (such as paying yourself what the IRS calls a “reasonable income”), it can be an excellent strategy to lower your income tax.
5. Deduct Business Travel Expenses
If you travel frequently for business, you may be able to decrease your company taxes. Personal vacation travel is not tax deductible, however, business travel is. If documented carefully, small business owners can combine personal travel with a justified business reason.
Consider pairing up board meetings, corporate retreats, training seminars, vendor visits, marketing research, and other legitimate business activities with your trips. Your business can cover the flight expenses, meals, and hotel expenses on days work is done at your destination. The IRS understands business owners need to live personal lives, too and don’t penalize personal expenses if documented properly and fall within the “necessary and reasonable” guidelines.
Bonus tip: save your frequent flier miles accrued during work travel for personal use! Business expenses are already tax deductible while rewards programs will actually increase your taxable income if you use them for business expenses.
Final Thoughts: Reducing the Tax Burden on Your Small Business
It’s worth considering how you handle the financial and administrative burdens that taxes impose on your company. Are you overpaying the government? Could you handle them more cost-effectively? Perhaps it is worthwhile to consider whether the expense of outsourcing this responsibility is more beneficial for your company than maintaining it in-house.
Whatever you decide, think about how an extra 120 hours and a few thousand dollars each year could affect your business. Make sure to consult with an accountant or a tax professional to see if you qualify for the potential savings discussed here.
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